Credit cards are an essential financial tool. How do they affect your credit score and report?

They can be useful especially when you don't have cash at hand or you just don't want to worry about cash while making purchases.

But can having credit cards affect your credit score and report and in turn make it difficult for you to get future credit applications approved? Let's take a look:

What is a credit score?

A credit score helps gauge the creditworthiness of an individual. The score is present on the credit report and it is majorly based on the individual's ability to repay their extended credit on time.

The credit score is calculated based on the individual's previous repayment history along with other financial actions and factors. That means people that have paid the majority of their credit repayments on time are bound to have a higher credit score than the ones that end up missing their repayments from time to time.

Moreover, the higher your credit score is, the better offers you will end up receiving from lenders and banks in the form of reward benefits as well as lower interest rates. On the other hand, low credit scores can make it difficult for you to get new credit products or credit extensions approved. That is because banks consider people with high credit scores as low-risk individuals.

A significantly lower credit score or rating can make it incredibly challenging for you to get a new credit card or loan.

Credit scores are typically determined by credit bureau agencies and they can be found on your credit report.

What is a good credit score for a credit card?

It's important to note that different credit scoring agencies calculate credit scores differently, with their own factors. Though, all of them follow the same principle - The higher the credit score, the better.

The minimum credit score for a credit card will depend on the type of credit card you are applying for. For more info on credit cards, read our guide.

If your Experian credit report shows your score out of 1,200, then a good credit score sits in the 500-699 band. A score above 800 will be considered excellent.

Does having a credit card improve your credit score?

Simply holding a credit card can improve your credit score - even before you factor in how you use it. The moment a credit card account is opened in your name, it begins contributing to your credit file in several ways that the major bureaux, including Experian, use when calculating your score.

How simply holding a credit card can build credit history length

One of the factors credit bureaux assess is the age of your accounts. The longer you hold a credit card, the more history you build. Even if a card sits in your wallet untouched for months, the open account continues to age, and a longer average account age signals stability to lenders. For Australians with a thin credit file - perhaps because they have only recently started borrowing - opening a single credit card can be the first step toward establishing a track record.

Why an unused credit card still contributes to your credit utilisation ratio

Credit utilisation measures how much of your available credit you are actually using. If you have a credit card with a $5,000 limit and you carry no balance on it, that $5,000 of unused credit pushes your overall utilisation ratio down. A lower ratio - ideally below 30 per cent across all your cards - is viewed favourably by scoring models. So even a card you rarely swipe can quietly work in your favour.

When having a credit card alone is not enough

Ownership on its own only goes so far. A credit card that is never used generates very little repayment data, which is the strongest signal bureaux look at. To get the full benefit, you need to demonstrate active, responsible use - making purchases and paying the balance on time each month. Think of the card as a tool: owning it gives you a head start, but using it well is what drives meaningful score improvements.

How long it takes for a new credit card to start positively affecting your score

When you first open a credit card, the hard inquiry may cause a small, temporary dip in your score. Within three to six months of on-time payments, however, the positive repayment data typically outweighs that initial impact. Over time, consistent on-time repayments may be reflected in your Experian score, though the effect depends on the credit reporting body's model and your wider circumstances. Patience and discipline are key - credit scores reward sustained good behaviour, not one-off actions.

How can using a credit card affect your credit score and report?

The way you use your credit card can definitely affect your credit score and report, directly, or indirectly.

Here are some ways how credit cards affect your credit score and report:

Applying for multiple credit cards together

Applying for multiple credit cards in a short period of time can result in multiple inquiries on your credit report, which can in turn decrease your credit score and make it even harder to get approved for the credit applications that you are sending out.

In order to determine your eligibility and to understand what kind of risks you possess as a borrower, most lenders inquire about your credit score and run a check through your credit report.

Now, your credit report doesn't just contain your currently active credit products, but it also contains the list of inquiries that have been run against your credit report. Even though there is no way of knowing whether these inquiries lead to rejection or approval, just through the credit file, too many inquiries in a short span can make lenders assume that you have been trying to get a new line of credit without any success.

Note that there are two kinds of credit inquiries - Hard and soft.

Soft inquiries do not affect your credit score and report in any way. Examples of soft credit inquiries include checking your own credit report or lenders checking your credit score to see which pre-approved offer you are eligible for.

But hard inquiries can affect your credit score and report. When you apply for a new credit card, it creates a hard inquiry on your credit file. Too many hard inquiries can lower your credit score by a few points easily. Under Australia's Privacy Act 1988, hard inquiries remain on your credit report for five years, after which they are removed from your credit file and their impact on your credit score also fades.

It can help or hurt your credit score

Getting a credit card can be one of the most effective ways to build a good credit history, as long as you only take on credit you can afford to manage and repay. It allows you to show that you can manage your credit well, which may help improve your credit score.

But this can only be useful if you use your credit cards wisely. That is, you need to pay your credit card bills every month, in full and on time. If you only pay a part of your monthly bill, it's not counted as a complete payment.

Your remainder payment is rolled over to the next month and interest is usually applied to it. Moreover, it's also recommended that you use 30% or less of your credit limit every month. This in turn shows that you can manage your credit limit well which will also in turn improve your credit score.

On the other hand, if you keep missing out on credit repayments or if you keep reaching your credit limit every month, you will be perceived as an individual who cannot manage their credit well and this can affect your credit score and report in a negative way.

Increasing your credit mix

You may not have a credit card yet, but you may have other forms of credit like a personal loan or auto loan. But credit cards are different in the sense that they are considered revolving credit which allows you to borrow over and over again, as long as you don't go beyond a set limit and you make at least a minimum payment.

By having a whole credit mix of different credit products like loans and credit cards, you get the ability to show the lenders that you can in fact manage your credit accounts effectively.

How to use your credit cards effectively

While there are many ways to use credit cards, the way you use your credit cards can impact your credit score and in turn determine your creditworthiness as well.

In order to maintain your credit score, you have to use your credit cards effectively, adopt a rather disciplined approach to repayment and always stay within the credit limit.

Here are the main tips to keep in mind in order to use your credit card effectively:

Timely payments

At the end of every monthly billing cycle, your credit card bill is generated and you get two options to repay your bill - You can either pay the complete outstanding amount or you can pay a minimum amount before the due date.

While it may be tempting to pay just the minimum amount and avoid late payment fees, it will not lower your total debt significantly. Your pending payment will get rolled over to the next month but before that, interest will be charged over it. Before you know it, you will be falling into a debt trap with a big chunk of outstanding debt.

That is why, even if you have the option to just pay the minimum amount, you should always try to pay the entire amount or at least as much as you can.

Credit utilisation ratio

It is the ratio of the money that you spend through your credit card and the total credit limit that you have. A high ratio means you are overspending and utilizing almost the entirety of your credit limit, which can be bad for your credit score.

Credit card history

The length of your credit card history can also impact your credit score significantly. A card that you have been using for more than three years will have way more insights about your spending and repayment patterns, and it will affect your credit score and report more, as compared to a card that you have only used for a few months.

Therefore, it is always advisable to always retain your long-standing credit cards, use them more, and clear their dues in a timely manner instead of getting a whole new card.

Number of credit cards you have

To reduce the credit utilisation ratio and to increase spending limits, people may prefer to own multiple credit cards. While there is nothing wrong with owning several credit cards, you should make sure to track all the numerous card payments. Delayed payments can lead to increased interest or payment defaults which can, in turn, affect your credit score and report in a negative way.

Hence, it is always advisable to use only a limited number of credit cards - as many as you can manage conveniently.

Credit card actions and their impact on your score

The table below summarises how common credit card behaviours affect your Experian credit score in Australia, how significant the impact is, and how long it typically lasts.

Can closing a credit card impact your credit score?

When you close a credit card, you close down a line of credit available to you. This can in turn increase your credit utilisation ratio and subsequently decrease your credit score.

As a result, it is always recommended to keep your credit cards open and not get them permanently closed even if you won't be using them for a while. By keeping your credit cards active, you increase the total line of credit available to you, as compared to the debt that you owe.

To keep the credit card active, you can add a small monthly recurring subscription to it like a gym membership or a streaming service.

Though it's important to keep in mind that if you are paying high annual fees and interest over a card that you do not even need, you may just be burning a hole in your bank account by keeping it active. Moreover, when you have a credit card, you end up using it some way or the other, even if you don't.

At the end of the day, you should only keep your credit card accounts open when you know you can manage them effectively.

Quick steps to rebuild your credit score using a credit card

If your Experian score is lower than you would like, a credit card is one way some people build a record of on-time repayments - the effect varies by individual circumstances. The steps below are tailored to Australia's 0-1,200 Experian scoring scale.

• Check your current credit report for errors. Before changing any spending habits, review your free credit report on ClearScore. Look for incorrect default listings, accounts you do not recognise, or repayments that were marked late in error. Disputing and correcting mistakes can deliver one of the quickest score improvements available.

• Lower your credit utilisation below 30 per cent. Add up the limits on all your credit cards, then make sure your combined outstanding balances sit below 30 per cent of that total. If your limit is $6,000, aim to carry no more than $1,800 at any point in the billing cycle.

• Set up automatic payments to avoid missed due dates. A single missed payment can undo months of progress. Set up a direct debit for at least the minimum amount on every card, then manually pay the full balance whenever you can. Automation acts as a safety net so you never miss a due date.

• Avoid new hard inquiries while rebuilding. Each credit application triggers a hard inquiry that can shave points off your score. While you are actively rebuilding, resist the urge to apply for new cards or loans unless absolutely necessary. Space any essential applications at least three to six months apart.

• Keep older cards open to preserve history length. Even if you are not using a particular card, keeping it open extends your average account age and adds to your total available credit. A small recurring charge - such as a streaming subscription - followed by an automatic payment is enough to keep the account active.

How quickly can these changes show on your Experian score?

Most lenders report account data to Experian monthly, so positive changes can begin appearing within one to two billing cycles. Reducing utilisation tends to have the fastest visible effect, often within 30 days. Building a consistent repayment track record takes longer - expect three to six months of on-time payments before the cumulative improvement becomes significant. There is no guaranteed way to boost your score overnight, but following these steps consistently is the most reliable path to a healthier credit profile.

Credit cards and your credit score - common questions

What is the biggest killer of credit scores?

Payment defaults are one of the most damaging events for your credit score. A default can be listed when a payment of $150 or more has been overdue for at least 60 days, the credit provider has sent you two separate written notices - the first requesting payment, and a later one stating that it intends to report the default to a credit reporting body - and at least 14 days have passed since that second notice. A default can drop your Experian score and stays on your credit report for five years from the day the credit reporting body records it. After defaults, the next most harmful factors are consistently high credit utilisation - regularly using more than 50 per cent of your available limit - and multiple hard credit inquiries in a short window, which suggest financial stress to lenders.

Is it better to cancel unused credit cards or keep them?

In most cases, keeping an unused credit card open is better for your credit score. An open card contributes available credit, which lowers your overall utilisation ratio, and it preserves the length of your credit history. However, if the card carries a high annual fee or tempts you into unnecessary spending, the financial cost may outweigh the score benefit. If you do decide to close a card, try to pay down balances on your remaining cards first to cushion the utilisation impact.

How many credit cards should you have in Australia?

There is no magic number, but most financial counsellors suggest one to three cards is a sensible range for the average Australian. Enough to build a healthy credit mix and keep utilisation low, but few enough that you can comfortably track every payment date. Each new application creates a hard inquiry, so spacing applications at least three to six months apart helps protect your score.

Does checking your own credit score lower it?

No. Checking your own credit score is classified as a soft inquiry, and soft inquiries have zero impact on your score. You can check as often as you like - in fact, regular monitoring is encouraged. Services like ClearScore let you view your Experian credit report for free, so there is no reason not to stay on top of it.

Final words

Credit cards and the way you manage them can impact your credit score in a big way. To get a better idea about how your credit cards may be affecting your credit scores, monitor your credit reports and your credit scores regularly.

With ClearScore, you can check your credit score with free credit reports shared directly with you.